When I read this by Paul Katzeff in IBD:
Say you start in your twenties. Forty years later, if your retirement savings account averages a modest 6% annual rate of return compounded quarterly, you’ll have nearly $173,000 from those $20 a week additions to your retirement savings.
I was taken aback. Where in the world has he been getting a 6% return over the last 20 years? He hasn’t been getting it in the stock and/or bond market. In the 20 years from 1991 to 2011, the average investor realized 2.1%.
He didn’t get it from CDs. They’ve been below 5% for the last twenty years and below 3% for much of the last 15 years.
The only way he could get that kind of return on the entire original principal is by taking significantly higher risks. How much risk can a retirement portfolio stand?
Calculating returns over the last 91 years as he does is facetious in the extreme. And over the 20 year period from the mid-1960s to to the mid-1980s there were no gains at all. All of those gains are concentrated in a relatively few boom years. Averages mean nothing under the circumstances.
If that hypothetical investor started saving at age 20, she’s 111 now. The reason not to start your calculation over the last 20 years or even the last 30 years is that most of you’d miss the boom years.
Hold on there, pahd-na.
“The average investor?” That’s a slight of hand.
Check out graphs of rolling 20 year returns, or, for someone like me who entered the workforce in the early 80’s, from 1985 to today. The S&P total return has been between 10-15%, and fairly consistently above 10%. Its the people who panic or attempt to market time, buying high and selling low who get the crap knocked out of them. There is an old saw: its not time in the market that kills you, its the time out. Even with 2.5% inflation, a whole discussion in itself, one probably gets between 8-12% real.
As for fixed income, thank your friendly Fed for placing the conservative investor and the older investor over a barrel and giving it to them good and hard. Criminal if you ask me. One ought to be able to get 3-5% from a portfolio of various fixed income instruments, not zero. (Funny thing, amid all the complaining about income inequality there was nary a peep about the Fed from Obama or most other politicians.)
In general, a young person ought to have a portfolio consisting of enough liquid, low yielding assets to cover emergencies and life realities (like a down payment on a house). The balance in riskier assets, basically low to high beta equities. By age 50 its time to think rebalancing, perhaps rebalancing to a less risky portfolio every 10 years. From there it really becomes personal risk appetite. Some would say that a 30% equity weighting at age 80 is OK. I’d be more in the 10-15% camp, depending upon individual circumstances. (Some financial planners use an age 95 planning horizon)
To go from the theoretical to the practical, I have a wealth manager, not to be confused with a Southern Trust, that I have instructed to maintain a 70/30 fixed to equity ratio. Diversified, of course. Semi-hedged in the equity side by international exposure and dividend yielding equities. Ultimately you have to ask yourself how much and how long are you willing to let your equities decline and recover. Hedged against interest rate increases by short duration and hold to maturity single issues, not funds. They are producing about 5%.
Details and personal circumstances vary, but I don’t find the guys argument out of bounds. And we wouldn’t use a plumber as the gage of how well he diagnoses and treats his own heart disease. So why cite the “average (amateur) investor?”